On the 2nd anniversary of the Lehman Brothers debacle, what is evident is the fact that economies have learnt very little from history. B&E does a quick recap of the occurrence, the domino effect and the current global economic situation By Asif Ahmed
September 15, 2008. Henry Paulson, the then Secretary of Treasury, United States, had just been informed of the impending Lehman collapse, when he excused himself from his colleagues to make a most important call. That call went not to the President, but to his wife, Wendy Judge, to whom Paulson said in a completely mellowed down voice, in contrast to his imposing 6 ft 4 inches physique, “I am afraid.” Paulson later termed the day as the most ‘horrific’ and ‘saddest’ day of his life.
In the absence of an acquirer and US federal guarantee, Paulson announced that US Treasury couldn’t locate a suitable borrower for Lehman Brothers, thereby purging billions in dollars and putting thousands of employees at risk. What he didn’t know then was how many billions were going to be affected by this collapse.
A month later in October 2008, in response to the subprime mortgage crisis, The Emergency Economic Stabilisation Act of 2008 was passed which authorised United States Secretary of the Treasury to spend up to $700 billion to purchase distressed assets, especially mortgage-backed securities, and make capital injections into banks. A year-and-a-half later, the Euro zone too had to adopt a similar bailout, called the European Stabilisation Mechanism, triggered by sovereign crises.
So, a few went under Chapter 11 bankruptcy reorganisation, a few more under Chapter 7 liquidation, and the topography of US financial system changed forever. On the second death anniversary of Lehman Brothers – and hundreds of other banks, which died in the hope of receiving a few million dollars of that $700 billion – the question that needs to be asked: Is the financial world a better place to live in, now? How much ground have we covered in terms of financial regulation so as to avoid future shocks?
2008 BC and 2008 AD
If one were to define the timeline of the financial world, the best way to line it up would be 2008 Before Crisis and 2008 After Destruction. The advanced economies were the first one to react and plug the loopholes that left big holes in the pockets and balance sheet of banks and central banks. Paul Volcker, former Chairman, Federal Reserve, who was hired to figure out a solution for the 21st century problem, had a simple military plan – he asked banks to curtail proprietary trading, private equity and other ‘risky’ investments that banks make with their own capital. On a more global platform, multi-lateral financial institution like the International Monetary Fund (IMF), Financial Stability Board (FSB) and Bank for International Settlements (BIS) worked in tandem to foster a more healthy financial system, the most recent of which is recommendations of Basel Committee of Banking Supervision (BSBS) and FSB to hold more capital. The BCBS has asked lenders to have common equity equal to at least 7% of assets, weighted according to their risk, including a 2.5% buffer to withstand future stress. Banks will have less than five years to comply with the minimum ratios – 4.5% common equity and 6% Tier 1 until 2019, to meet the buffer requirements. Banks are currently required to have common equity equal to 2% of total assets and 4% Tier 1 capital.
September 15, 2008. Henry Paulson, the then Secretary of Treasury, United States, had just been informed of the impending Lehman collapse, when he excused himself from his colleagues to make a most important call. That call went not to the President, but to his wife, Wendy Judge, to whom Paulson said in a completely mellowed down voice, in contrast to his imposing 6 ft 4 inches physique, “I am afraid.” Paulson later termed the day as the most ‘horrific’ and ‘saddest’ day of his life.
In the absence of an acquirer and US federal guarantee, Paulson announced that US Treasury couldn’t locate a suitable borrower for Lehman Brothers, thereby purging billions in dollars and putting thousands of employees at risk. What he didn’t know then was how many billions were going to be affected by this collapse.
A month later in October 2008, in response to the subprime mortgage crisis, The Emergency Economic Stabilisation Act of 2008 was passed which authorised United States Secretary of the Treasury to spend up to $700 billion to purchase distressed assets, especially mortgage-backed securities, and make capital injections into banks. A year-and-a-half later, the Euro zone too had to adopt a similar bailout, called the European Stabilisation Mechanism, triggered by sovereign crises.
So, a few went under Chapter 11 bankruptcy reorganisation, a few more under Chapter 7 liquidation, and the topography of US financial system changed forever. On the second death anniversary of Lehman Brothers – and hundreds of other banks, which died in the hope of receiving a few million dollars of that $700 billion – the question that needs to be asked: Is the financial world a better place to live in, now? How much ground have we covered in terms of financial regulation so as to avoid future shocks?
2008 BC and 2008 AD
If one were to define the timeline of the financial world, the best way to line it up would be 2008 Before Crisis and 2008 After Destruction. The advanced economies were the first one to react and plug the loopholes that left big holes in the pockets and balance sheet of banks and central banks. Paul Volcker, former Chairman, Federal Reserve, who was hired to figure out a solution for the 21st century problem, had a simple military plan – he asked banks to curtail proprietary trading, private equity and other ‘risky’ investments that banks make with their own capital. On a more global platform, multi-lateral financial institution like the International Monetary Fund (IMF), Financial Stability Board (FSB) and Bank for International Settlements (BIS) worked in tandem to foster a more healthy financial system, the most recent of which is recommendations of Basel Committee of Banking Supervision (BSBS) and FSB to hold more capital. The BCBS has asked lenders to have common equity equal to at least 7% of assets, weighted according to their risk, including a 2.5% buffer to withstand future stress. Banks will have less than five years to comply with the minimum ratios – 4.5% common equity and 6% Tier 1 until 2019, to meet the buffer requirements. Banks are currently required to have common equity equal to 2% of total assets and 4% Tier 1 capital.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
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IIPM makes business education truly global
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IIPM B-School Facebook Page
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IIPM B-School Detail
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An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
Zee Business Best B-School Survey 2012
Prof. Arindam Chaudhuri's Session at IMA Indore
IIPM IN FINANCIAL TIMES, UK. FEATURE OF THE WEEK
IIPM strong hold on Placement : 10000 Students Placed in last 5 year
IIPM's Management Consulting Arm-Planman Consulting
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM B-School Facebook Page
IIPM Global Exposure
IIPM Best B School India
IIPM B-School Detail
IIPM Links
